The Fed cuts interest rates - again!

10.30.08
By Nicholas Storie

In recent months, the government has taken a number of strong actions in the attempt to soothe the unruly stock market and give economic growth an energy boost.

The latest of these steps involved cutting the key interest rate for bank lending (known as the federal funds rate) by half of a percentage point. This decision was made in order to encourage lenders to offer credit more freely and to make it cheaper for borrowers to obtain loans.

It may sound like a fine idea, but what impact will that decision actually have on your wallet and your credit?

Well, truth be told, the average consumer might not see an immediate difference in terms of rates on loans, mortgages and credit cards.

This is because credit cards and loans generally base their rates on the prime rate - which is the federal funds rate plus 3 percent.

Writing on istockanalyst.com, Miranda Marquit explains that theoretically, credit card rates should fall, because they take the prime rate as their base rate. However, that doesn't keep providers from changing the terms on the cards themselves.

For example, a credit card that charges interest based on the prime rate plus 8 percentage points might be amended so that it now charges based on the prime rate plus 9 percent.

Also, even if rates improve, banks are not giving out loans like they used to. Forbes noted that "even borrowers with stellar credit and cash collateral are experiencing a more rigid lending process."

This means that the interest rate cut may not actually increase lending, at least not in the short term.

So, in the end, whether the Federal Reserve's latest decision will actually result in more money in your pocket or the ability to take out a needed loan is still debatable.

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The Fed has cut interest rates - but will it make any difference?